DraftKings FanDuel Daily Fantasy Sports Scandal Explained: What Happened And Who Could It Affect?

A daily fantasy sports scandal that called into question the fabric and integrity of the games purveyed by the two major players in the industry, FanDuel and DraftKings, continued to grow Tuesday. Less than one day after it was announced that a DraftKings employee who won $350,000 during Week 3 of the NFL season in a competition at rival site FanDuel had inadvertently released data that was not commonly available to the public, users were left to question the fairness of the games.

As allegations were raised about a scheme that was likened to insider trading in the original report by the New York Times, official responses were issued by professional sports leagues, which are often sponsored by fantasy services, and both companies in question barred their employees from participating in daily fantasy while they scrambled into recovery mode. But what exactly happened, how important the leaked data was and who stood to gain or lose if employees had access to the information still remains to be answered.

The New York Times also reported that other employees of daily fantasy sites had recently won significant payouts. The companies released a joint statement defending the fairness of their games, in which users assemble fantasy teams of real athletes and compete in weekly NFL competitions, as well as other sports.

"Nothing is more important to DraftKings and FanDuel than the integrity of the games we offer to our customers. Both companies have strong policies in place to ensure that employees do not misuse any information at their disposal and strictly limit access to company data to only those employees who require it to do their jobs," the statement read.

What Are Daily Fantasy Sports, And Are They Gambling?

Daily fantasy football essentially lets users build a lineup of real athletes and have them compete against other users' lineups. Athletes earn the user points based on their statistics in that week's real games.

The type of massive competition in which DraftKings writer Ethan Haskell won $350,000 pits a daily fantasy player against a large number of other participants. You pay an entry fee and get paid out according to where you finish among the large number of users.

Entry fees can range from 25 cents to $1,000, and players compete against dozens, hundreds, or even thousands of other users to get paid out. While some have drawn comparisons to gambling -- the NCAA in fact, bars its players from competing in daily fantasy -- the services are legal because of a 2006 law that barred online gambling. A carve-out in the Unlawful Internet Gaming Enforcement Act allowed for fantasy sports.

This was aimed at more traditional forms of season-long fantasy sports, however, typically consisting of leagues composed by friends or run by a service with a one-time fee. Daily fantasy sports would not be invented until three years after the law was passed. Daily fantasy is able to exist principally on the argument that it is a skill-based game, whereas gambling relies on chance.

What Was The Importance Of The Leaked Data?

Playing daily fantasy sports can seem a lot like playing the stock market: You're trying to outsmart the field, essentially attempting to locate players who are undervalued by other users. Haskell accidentally posted information that listed the data behind how often users selected certain players in their lineups in DraftKings' massive Millionaire Maker game. Users typically don't see other players' lineups until after the real NFL games have started.

If a player had access to this information before setting a lineup, he could, essentially, zig when everyone else zagged. If the lion's share of users in a competition chose a certain star running back -- say the Green Bay Packers' Eddie Lacy -- then they would all receive the same amount of points for his performance and hardly move up on the winnings board. The player with the lineup data, seeing most people chose Lacy, could opt for, say, Minnesota Vikings running back Adrian Peterson instead, improving his chances at outpacing a large share of the competitors.

DraftKings and FanDuel employees are not allowed to play in matchups run by their own leagues. But they can compete in games run by their rival services. So when it broke that Haskell both accidentally posted lineup information and won $350,000 by finishing second in a FanDuel competition, many suggested employees could be using data unavailable to the masses to win big prizes.

So Who, If Anyone, Got Cheated?

Right now it's unclear if Haskell or other employees had access to the data before locking in their lineups. And it's unclear whether Haskell or others benefited financially because of the lineup information. Even if they did, there isn't much regulation over the daily fantasy industry. DraftKings said Haskell received the data after his lineup had been set. “We interviewed everyone involved, and they all corroborated what really happened,” Jason Robins, the company's CEO, told the Wall Street Journal.

"Employees with access to this data are rigorously monitored by internal fraud control teams, and we have no evidence that anyone has misused it," read the statement from DraftKings and FanDuel. "However, we continue to review our internal controls to ensure they are as strong as they can be. We also plan to work with the entire fantasy sports industry on this specific issue so that fans everywhere can continue to enjoy and trust the games they love."

The games are monitored by the Fantasy Sports Trade Association, which has both Robins and the CEO of FanDuel on the board. Eilers Research, which studies daily fantasy sports, found that the services will garner some $2.6 billion in entry fees this year, reported the New York Times.

If a player had the lineup data early it would be a significant leg up on the competition and give him a better chance at recouping his entry fee and turning a profit. Daily fantasy games are not like blackjack, where you're competing against the dealer and the entire table can win. And what has been alleged of daily fantasy employees isn't exactly how most people would picture insider trading either. It's not like they knew which real NFL athletes would perform well ahead of time, a piece of information about the results of the real games. It wasn't like a game fix in sports gambling.

But Haskell or others could have had access to the usually secret choices of other fantasy users. That would mean he had a far better chance at outwitting other players, simply by making different selections. It wouldn't have guaranteed a payout, but it would make the chances of winning much greater. And it would mean that the average Joe setting a lineup had been cheated out of a fair fight.